FRANKFURT — Despite bailouts for Greece, Ireland and Portugal, Europe’s debt crisis could still spread to core euro zone countries and the emerging economies of eastern Europe, the International Monetary Fund warned on Thursday.
The IMF said it stood ready to provide more aid to Greece if requested, though the country that triggered the sovereign debt crisis in 2009 still had plenty of untapped options for raising extra cash itself though privatizations.
“Contagion to the core euro area, and then onwards to emerging Europe, remains a tangible downside risk,” the global lender’s latest economic report on Europe said.
Finance ministers of the 17-nation single currency area are set to approve a €78 billion, or $111 billion, rescue plan for Portugal next Monday after Finland’s prime minister-in-waiting clinched a deal to ensure parliamentary approval of the package.
But markets are increasingly concerned that Greece may never be able to pay back its €327 billion debt pile and will have to restructure, forcing losses on investors with severe consequences in the euro zone and beyond.
Asked whether there could be new aid package to help Greece work through its fiscal recovery program, the I.M.F.’s European department director, Antonio Borges, said the fund was open to the possibility.
“The Greeks have to take the initiative, and so far they have not approached us. The I.M.F. stands ready” to provide additional support “as a matter of policy,” he told reporters.
However, Athens also had the potential to raise funds by selling state assets, with the €50 billion mentioned as a possible estimate of revenues from a privatization program “probably less than 20 percent of all the assets the Greeks could privatize.”
The semi-annual I.M.F. report said peripheral members of the euro zone needed to make “unrelenting” efforts to overcome the debt crisis and prevent it spreading further.
It also urged the European Central Bank to tread carefully on further rises in interest rates after last month’s first increase since 2007, saying euro zone monetary policy could “afford to remain relatively accommodative.”
Mr. Borges said the program of austerity measures and structural reforms agreed a year ago was “probably the best thing that can happen” to Greece, though there was always the question of whether it was too ambitious.
Greece has implemented harsh cuts in public spending, public sector wages and pensions but has struggled to raise revenue due to a deep recession and chronic tax evasion. The government faces growing resistance to austerity, highlighted by a general strike on Wednesday.
Greek sovereign bond yields soared to fresh euro-era highs on a growing belief that euro-zone finance ministers will not deliver fresh aid for Athens at their monthly meeting next week. The yield on two-year Greek bonds rose to an eye-watering 27 percent.
By contrast, Portuguese and Irish yields eased after the Finnish deal on Thursday removed one key political uncertainty.
The euro-skeptical True Finns party, which scored big gains in last month’s general election by vehemently opposing the Portuguese bailout, said it would not take part in talks to form the next Finnish government.
The Washington-based fund’s views about Greece are being closely watched ahead of next month’s decision on whether Athens receives the next €12 billion tranche of its €110 billion E.U./I.M.F. bailout.
Ireland and Greece are already dependent on €52.5 billion of I.M.F. aid while Portugal is awaiting a €26-billion, three-year lifeline from the fund.
Banks in the troubled countries are being kept above water by unlimited E.C.B. liquidity, and the I.M.F. said the central bank might need to extend that system again beyond June 12.
Financial markets and economists are overwhelmingly convinced that Greece will have to restructure its debt mountain and force investors to take losses.
But Mr. Borges said the I.M.F. believed Greece was not bankrupt despite its high debt.
“All I.M.F. programs are based on debt sustainability, so as long as a program is in place that means that the I.M.F. believes Greek debt is sustainable,” he said.
Article source: http://www.nytimes.com/2011/05/13/business/global/13iht-imf13.html?partner=rss&emc=rss
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